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Is It Time to Fly or Buy on Ciena?

This stock just hit a 52-week milestone. Where will it head from here?

Shares of Ciena(Nasdaq: CIEN) hit a 52-week high on Monday. Let's look at how it got there and see whether clear skies are still in the forecast.

How it got hereI'm mildly in disbelief that Ciena is moving higher, given the trouble telecom equipment providers have had in squeezing mainline investment spending out of big telecom providers. In recent months, almost all spending has been diverted to building up back-end cloud-computing capabilities at the expenses of fiber-optic product, switching, and networking product providers. It's obvious that telecoms will need to increase spending to handle the increased bandwidth and storage. However, how much it'll be and when that'll happen remains a mystery.

Ciena's management seems to think that spending uptick will come sooner rather than later. It has been undeniably optimistic that growth would be much better in the second half of 2012 than in the first half, leading many to boost the share price higher. In Ciena's most recent quarter, product revenue rose 14% and adjusted gross profit rose nearly 10%. With an order uptick in the coming months, Ciena may indeed be set up to head significantly higher.

Let's not forget, though, that there's another, highly uncertain, side to this equation. Cisco Systems(Nasdaq: CSCO) and Alcatel-Lucent(NYSE: ALU) are vying for the same large networking customers that Ciena is courting, and both have sizable amount of cash to make deals happen. The recent history of orders from other networking-equipment providers also doesn't bode well. JDS Uniphase(Nasdaq: JDSU)missed the mark in its last quarter as a combination of macroeconomic weakness and slow spending curtailed orders. More recently, network-equipment vendor Acme Packet(Nasdaq: APKT)cut its full-year forecast (again!) on spending uncertainties and overall macro weakness.

In the race to the bottom, Alcatel-Lucent is clearly winning, although Cisco and Ciena are both chipping in with sizable five-year losses.

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Cash/ Debt

Ciena

N/M

17.7

37.9

$636 million / $1.44 billion

Cisco Systems

1.8

8.3

8.6

$48.4 billion / $16.4 billion

Alcatel-Lucent

0.6

17.6

8.4

$6.16 billion / $5.97 billion

Sources: Morningstar, Yahoo! Finance. N/M = not meaningful.

One thing you'll notice that puts Ciena at a disadvantage from the start is its net debt position. Cisco is creating an insane amount of cash flow annually, which gives it a level of product diversity and negotiating power that Ciena just doesn't have. Alcatel-Lucent has a good amount of cash as well, but it has also been dealing with steady losses and a massively underfunded pension plan, which threatens to chip away at its remaining cash.

One aspect all three do share in common is that they needed mainline infrastructure spending to step up so as to grow profits. Each of these three has done what it can in terms of cost-cutting, and they made need to take further steps in the cutting process to bring supply more in line with demand.

What's nextNow for the $64,000 question: What's next for Ciena? That question depends on when big telecoms decide to step up spending, if Ciena can garner lure large customers away from choose Cisco and Alcatel-Lucent, and if it can pay down at least some of its net debt position.

I can almost guess what you're thinking: "$14 is quite a way away!" And yes, you are correct. What's important to note is that expectations have been high from Ciena's management while Cisco, Alcatel-Lucent, JDS Uniphase, Acme Packet, and most of the equipment sector have either blatantly missed on earnings or lowered their outlooks. Ciena's 100GB products are a growth driver in terms of big data transmission, and I think the company is a long-term winner, but I'd feel much more comfortable getting in closer to $14 than chasing it here at a new high, especially with the prospect that it could take months or years before spending really ramps up.

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Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

The Motley Fool owns shares of Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Acme Packet. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong